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Letter of Intent & Letter of Acceptance : Difference

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Sat, 2006-11-04 04:31

Mohamed Sahir

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Hi Friends,

What is the difference between Letter of Intent & Letter of Acceptance.What is their priority??

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Mon, 2006-12-11 20:57

Andrew Flowerdew

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Stan,

Point 7 - I think you should get hold of a copy of the Housing Generation Construction and Regeneration Act 1996 as this now governs all construction contracts in the UK (those which come within it’s definition anyway which is 95% of what any normal person would call a construction contract) It covers thing like payment terms, right to suspend work, rights to adjudication, requirement of withholding notices etc. For something very similar in your part of the world (but with important differences) look to Singapore, New Zealand or Austrailia.

Point 1 - Yes, being pedantic, a contract is a contract, but my use of preliminary contract was in the context that it was in advance of the sub contract. I believe some learned Judges have used the same terminology as I have.

And if you really want to be pedantic, when is an agreement that complies with all the legal requirements of a contract, not a contract under English law? Such a thing exists.

Points 3 - 6 The point you are missing here is that if the Sub Contract came into existence then it may or may not have acted retrospectively to apply to the work covered by the preliminary contract. No way of telling as you have to either deduce the intention of the parties at the time of making the sub contract in order to give an answer and you can’t do that from the information given OR from their conduct it can be demonstrated that they intended the sub contract conditions to apply to the earlier work. If so the sub contract conditions apply, not those in the letter of intent.

Also as to your point no 3 - if the MC delays in preparing the sub contract documents he is in fundamaental breach of contract!!!! In breach of what contract? An agreement to enter into a future contract is an agreement to negotiate only, therefore not a contract. How can he be in breach of a contract not yet formed?

Sun, 2006-12-10 22:21

Stanley Chan

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Hi,

1. There is no such thing as preliminary contract. A contract is a contract.

2. Altering thge term in the LOI constitutes a counter offer, and is pending the other side to accept and counter sign beofre a contract is form - simple contract law principle.

3. Restriction - basically all the restriction put into the LOI is part of the contract, and once signed and performed, the parties have to follow. However, as the preparation of the formal contract for proper execution is on the Main Contractor’s side, if the MC has delayed in preparing the contract document and affected the payment of the subcontractor, This is a fundamental breach on the MC side. 2 possibilities here:
a) The SC can determine the contract and reimburse quantum meruit his workdone
b) If both parties want to maintain the contract, a supplementary agreement can be signed to void the restriction term

4. Remeasurement or not shall be according to the original conditions of contract. If it is a lump sum contract, it will not be remeasured.

5. I do not understand why the SC will be on site (probably started working) before he received the LOI. He is working without a contract and his workdone may not be recovered. It is unwise not to do anything but continue to work if he does not agree with the contents of the LOI. In the case, I think the court may probably decide that there is a contract formed by performance starting from the date of the delivery of the LOI to the SC. The terms and conditions of the LOI (together with those included in the document listed in the LOI) will form the basis to justify the rights and obligations of baoth parties. The courty will also apply tests on the validity of some unfair or restrictive terms that may prevent the performance of the contract by any of the party. Hence, it does not mean that the SC shall accept any thing requested by the MC, things shall be governed by the contract that they intended to form at the beginning.

6. if it used the word lump sum, then it is not re-measureable.

7. I am not familiar with HGRCA 96 contract, I cannot give you advice.

Good lucks.

Thu, 2006-12-07 17:32

Skan Bu

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Hi,

Thanks for the contribution.

Preliminary contract?? This is adding more confusion. There is LOI, LOA, Prelim Contract & Actual Contract.

What will happen if the SC sign the letter but alter the terms in the letter? Must the MC make payment? and will the amended letter stand in a court of law?

The RESTRICTION I mean is that SC must sign otherwise no payment and he would have worked free for a month.

Am I right to interpret that your interpretation is that the parties had the intention to remeasure the work.

The SC was on site before the letter was issued, so if SC do not sign the letter, does that mean his conduct on starting work indicated that the SC agree to anything the MC throw at the SC.

In this case, "Unfair Contract Terms Act" have a case?

If the enquiry documents did not state what type of contract & the LOI also does not state, would you interpret that the work is remeasurable?

I brought this up with a few mates & they also think that all the necessary conditions for a contract exist in the letter except for the terms on payment and according to the HGRCA 96, the MC will have to follow the scheme.

We can’t agree on whether it is remeasurable.

Thu, 2006-12-07 07:54

Stanley Chan

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Hi all,

1) If the subject of the letter is called LOI then it is a LOI. Besides, the wording just stated "It is our INTENTION to award..." but not "we would award....".

2) According to the English law system, the parties have entered into a contract by performance (i.e. starting work and giving instructions etc). For the terms of the contract the court will make reference to the contents of the LOI and its listed document.

3) If the other party has not shown any objections to the added terms in the LOI, then they are enforceable.In UK there is "Unfair Contract Term Act" to govern the vaildity of unfair conditions put into the contract.

4) I suppose there is the "form of contract" to be used stated during the tender or quotation stage as there are document like Preliminaries and Specificatons. Whether the work is remeasureable or not depends on the type of conditons of contract that used or stated in the tender document or LOI.

Moreover, if the court decided that the contract is void then the subcontractor can be recovered his workdone on a quantum meruit basis.

5) Payment period shall refer to the conditions of contract. One shall note that non-payment is a fundamental breach of contract.

6) Legally it stands well under the UK legal system if the LOI is properly prepared, but I do not know what will be the case in the US or other country’s legal system.

My 2 cents.

Thu, 2006-12-07 05:00

Andrew Flowerdew

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Skan

1. LOI & preliminary contract!!!!!!!!!
2. Yes, but sub contract may have come into existence even though not formally executed.
3. Which restriction?
4. Probably, on what basis did the SC price the work? Not definitive but would indicate the intentions of the parties at the time of agreement.
5. I’m assuming this is in the UK and hence in the absence of terms in accordance with the HGRCA 1996, the Statutory Construction Scheme terms will apply (whether acceptable or not) But if the sub contract came into existence then the terms of that would most likely apply.
6. It stands in the usual mire of legal uncertainty that happens every time in this situation. Hence my previous post saying avoid using LOI’s except as a very very last resort.

The intention no doubt was that it is a LOI when written due to:

(2) - intention to award... subject to negotiation

ie future tense, no agreement or contract exists at the moment.

But it also contains sufficient info to form a preliminary contract for the work indicated as well.

Then the sub contract is never executed and events overtake everything and the mess begins to form.

The vital question which can’t be answered from the above is did the sub contract come in existence. eg through conduct.

Wed, 2006-12-06 03:19

Skan Bu

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Hi,

Just come across a letter of intent from a main contractor to a subcontractor.
It started off:
(1) refernece to the enquiry sent
(2) "It is our intention to award...subject to negotiation & execution of a formal Sub Contract. The Sub Contract will following: a) letter of enquiry; b)Applicable terms (DOM/1); c)Prelims; d)Spec; e)drawings; f)Safety plan; g)Risk assessment; h)Ground investigation report.

(3) LAD
(4) Retention
(5) Defects Period
(6) Execution as a deed
(7) The period
(8) A Sub Contract sum of £xxxx calculated by extending the rates contained in the priced BoQ received.
(9) Minutes ofpreorder meeting
(10) Accept this letter as instruction to commence
(11) We shall pay for work done up to £xxxx subject to set off. No obligation to make further payment until agreement & execution of the Sub Contract & bonds, guarantees etc
(12) If Sub Contract is executed, it supercede this letter
(13) If work terminated without the Sub Contract entered, this letter will apply; only reinburse reasonable cost & owe no compensation & you hav eno claim for breach of contract, los of profit etc
(14) No payment will be made until this letter is signed.
(15)Please indicate your acceptance... To be signed & dated.

This letter is not more than 2 years old.

The Sub Contractor signed & return 1 month from issued & infact was on site before theletter was sent but apparently start work 4 days after the letter was sent.

MY QUERIES:
(1) Is this a LOI or LOA?
(2) Is this a Contract if SubContract was never executed?
(3) Is it right to enforce such a restriction to a sub contractor?
(4) Is the work remeasurable?
(5) What payment period is acceptable?
(6) Where does this stand in a legal situation?

Hope someone could enlighten me but when I came across this, I thought of this is so unfair.

Mon, 2006-12-04 05:30

David Bordoli

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Hi All

In Speechly Bircham’s November issue of Inform in a useful paper from Lewis Cohen, Letters of Intent – ‘back to basics’.

You can find it at http://www.speechlys.com/public/documents/SB_inform%20Con_1.pdf.

Regards

David

Fri, 2006-12-01 11:33

Andrew Flowerdew

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For the pitfalls of letter of intents have a look at this article

http://www.qsweek.com/navpage=qsweek.contentspage&fixture_page=6090444&r...

Thu, 2006-11-23 12:25

Andrew Flowerdew

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Best advice with regards both - avoid using either, use a contract unless absoultely no other option.

Either can create a contract when it was not intended if the incorrect wording is used.

Letter of intent is meant to signify a contract will be entered into in the future, but very often ends up creating a contract, more so these days when courts don’t try very hard NOT to find a contract and presume in a commercial transaction that a contract was intended.

Wed, 2006-11-22 02:01

#10

Samir Gharib

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Hi, all

letter of Intents are the legal equivalent of "almost pregnant". you can’t legally state you agree to something and then state that you don’t in the same document. If the LOI is held to be binding by a court, you have a contract with general essential terms but without the many terms you would normally want in final agreements - a liability limit, warranty waivers, detailed payment etc. If upheld in court, you have the worst possible contract to work with - one in which either the court or the parties will have to work out all the details when the parties are at odds with each other.

what will happen if the contractor abused that letter and announced that on the Press?? - then the client decided not to go with the project any more or assigned a different contarctor??

Mon, 2006-11-20 23:53

#11

Stanley Chan

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Shahzad,

You are right, I forgot to mention that.

The main reason to use a LOI to award a contract is to avoid the time-consuming procedure to prepare and sign the formal contract that can delay the commencement of work.

Mon, 2006-11-20 17:11

#12

Skan Bu

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Hi,
(1)
LO acceptance means the enquirer accept the quotation from the tenderer without any additional conditions on the quotation?
Does that mean start work and it is a binding contractual relationship?
So is a sub contract still necessary?

(2)
LO intent is only an intention to create a relationship and so intention does not mean that the enquirer agree with all the terms, conditions & the quoted rates stipulated in the quotation but only "look favourable" and only wish to award the work to the tenderer subject to further negotiation that can reach agreement with both parties.
Is this right?
So it is of no guarantee that the tenderer will get the job?
If the tenderer start working on site prior to any negotiation and agreement, he could stand the risk of working and pay less than he quoted?

Could this be a reason why the Audit team always insist on a sub contract even when the whole job has completed?

Mon, 2006-11-20 10:52

#13

Shahzad Munawar

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Letter of Intent shows the intention of Employer to assign the Contract specifying some special stipulations not included in Conditions of Contract which become part of the Contact upon signing of both the parties.

Furthermore, LOI is used as reference document in Arbitration and Litigation alongwith other tender correspondence.

Whereas Letter of accept is merely acceptance of Tender.

Mon, 2006-11-20 07:51

#14

Stanley Chan

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Hi Roger,

You are right that the letter of intent is not supposed to be a letter of acceptance. It is merely a letter to show the intention to accept an offer.

However, it is not uncommon especially in UK and HK that people use the letter of intent with appropriate wordings built-in to form a binding contract with the tenderer. It is usually done by making reference to the document (including the tender document and related correspondence) to be used in the making of the contract, and with expressly wordings about the forming a contract upon signing the letter of intent.

The rights of the parties is protected by not only the contract laws but the common laws and case laws under the UK legal system.

Mon, 2006-11-20 07:00

#15

Roger Thomas

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I would never accept a Letter of Intent as being sufficient to enable work to start or for the contractor to incur costs unless the letter has some wording in it that indemnifies the contractor and enables him to recover those costs in the event that the project is abandoned or does not proceed for some reason.

Sun, 2006-11-19 10:25

#16

Stanley Chan

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A letter of intent is just a letter that shows the intention of the employer is going to accept the tender of a particular contractor.

However, If there are explicit wordings stating that by signing and returning the duplicate copy of the letter of intent will form a binding agreement between the parties, then the letter of intent will create a contractual linakge between the parties.

It is done to let the contractor to start work in advance without the need to wait for the preparation of a formal contract for signing, as it normally takes time.

A letter of acceptance is a letter to accept the tender straight away.

Sat, 2006-11-18 05:01

#17

Dayanidhi Dhandapany

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Letter of Intent can’t be consider as an agreement, it is merely an intention to award the works to someone. you need to have legal document i.e subcontract agreement. This agreement can bind the subcontractor to execute the said part of the sub contract works in a manner described in the subcon agreement.

Tue, 2006-11-14 13:47

#18

Skan Bu

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Hi,

Just to add on to this subject & hope someone can clarify for me.
Why in situation when the Commercial Audit team seems to place so much importance to had a Sub-contract in place even at Final Account stage if a Letter of Intent or a Letter of Acceptance is already there? What are the significants or the consequences if Sub Contract is not in place? Merits & demerits?

Sat, 2006-11-11 03:31

#19

Ahmed Farouk

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Of course there is difference between both of them but pls keep in mind the legal system you are subject to in order to be aware of the obligation of both of them. However, I do beleive that the letter of intent is a promise that you are going to cntract with him so be arware of having some conditions to allow you not to fulfill it if any thing happened.

Thu, 2006-11-09 23:03

#20

Tommy king

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HI ,,,,

Letter of Intent = Letter before marriage
( not forming part of the contract )
Normally issued out when you have some subcontractor in hand and you dont want to loose them at the mean time waiting for the Main Contract to be prepared.

Letter of Acceptance = Letter after marriage
( form part of the contract )
If nothing go wrong after signing Letter of Intent , then LA then follow by Main Contract

:) cheers

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